Books in order: prepare for your kids' uni fees

Some experts say you should pay off your mortgage before considering university savings.

As university fees continue to rise, some parents are factoring these costs into their savings plans.

In 2006 the Nelson education reforms brought a 25 per cent increase to university fees and since then fees have continued to rise, with many degrees now costing double what they cost a decade ago.

The key to preparing, say financial planners, is to understand your financial position: can you afford to help your kids without jeopardising your own retirement plan? You also need to ensure you have maximum flexibility with any long-term savings you make.

When should you start saving?

Senior financial adviser Sarah Riegelhuth, of financial advisory firm Wealth Enhancers, says starting a savings fund when your child is born is one way to lighten the burden.

“The earlier the better for any saving, because you can put less away each year [to reach the same goal] and you benefit from the power of compounding interest over a longer period of time. If you leave it until later you need to put in a lot more to catch up.”

Riegelhuth says it's important to have a flexible and tax-effective strategy for this type of long-term saving.

“The best thing that we use, and what we recommend to our clients, is using insurance bonds: they're a tax-effective investment,” she says.

If you keep the money in bonds for 10 years then there are significant tax advantages.

“They pay a flat rate of 30 per cent tax on any investment income earned and they have franking credits so it's often less, and it is a tax-paid investment, which means, like your superannuation, you don't need to declare it with your income.”

Education funds

Riegelhuth says there are funds available specifically for saving for a child's university fees, however they are often inflexible.

“I steer away from them. You have to use them for education and you don't know what's going to happen from when someone is born to 18 years down the track. You could be really wealthy by then.”

Independent financial advisor Matthew Ross, of Roskow Financial Advisory, also avoids the education funds. “They are so rigid and the fees aren't particularly cheap. In some of them, if the kid decides not to go to university, then they don't get the money - and you've got to commit when the kids are in primary school.”

Ross says he regularly speaks with his clients about how they will pay for their children's education.

“Education is very important to a lot of our clients. It's interesting to hear how much people value their kids' education and giving them opportunities,” he says.

However, there can be a downside to this if it's not taken in context of a family's overall financial position.

“There are many clients breaking their backs to put their kids through private school. You'll drop half a million on private school fees and then if you take on the extra responsibility of providing university fees well, some parents just say, 'There's HECS, you can rely on that to get you through uni, you're on your own from there'.

"But some parents will do anything for their kids, even when they can't afford it.”

Pay off your mortgage first

Ross always advises his clients to pay off their home loan before starting any savings funds for their children. He says university fees often come at a time when the parents are in the phase of planning for retirement.

“They've got to do the calculations, they've got to get advice to find out how much do you need and can you afford this, get an objective third party that can say, 'guys you're going to stretch yourself here, you're going to be working 'til age 65 or 70 to do this'.”

Financial empowerment coach Linda Fitzhardinge says parents should never sacrifice their own retirement so their children can graduate debt-free.

"Your children come out of university and they've got 40 years to pay that debt off. But if you're a 45, 50-year old person and you pull that out of your super fund, that will make a big impact to your final number and you don't have that time in the market any more. People might say, 'My son's going to look after me in my old age'. Well, you'd better hope so if you're trying to live off the dole or the pension," Fitzhardinge says.

“You need to think, is this surplus funds you have lying around or is this money you will be relying on?”